Invoice finance offers businesses cash flow, but many do not know what the fee structure is. Invoice finance is different from straightforward business loans as it is accompanied by overlapping charges like a service fee, a discount rate, and potentially setup, maintenance, and termination costs.
What is invoice finance, and how does it work?
Invoice finance is a short-term business funding option that allows businesses to release money tied up in unpaid invoices. Businesses now have access to cash immediately instead of having to wait 30 to 90 days for customers to pay. Invoice finance is common amongst businesses with strong sales pipelines but uneven cash flow.
The process:
A lender advances a borrower a percentage of their outstanding invoice value (usually between 70%-90%), which the borrower will use to cover operational costs. When the borrower’s customer pays the invoice, they pay back the advance with the additional invoice finance fees and interest.
There are two main types of invoice finance: invoice factoring and invoice discounting. With invoice factoring, borrowers sell their invoices to the lender at a discount, and the lender then takes control of collecting payment from the customers. With invoice discounting, borrowers retain control of their credit control process and continue chasing payment themselves, while accessing funding against their invoices. Invoice factoring oftentimes costs more because the business pays for the lender’s collections work, but it frees up time and admin for their business. Invoice discounting is often preferred as businesses are able to keep their client relationships private and can manage payment collections internally.
| Invoice factoring | Invoice discounting | |
| Who chases payment | The lender | You |
| Client knows about the arrangement | Usually yes | Usually no (confidential) |
| Typical service fee | 0.75–3% of invoice value | 0.2–1% of invoice value |
| Discount rate (interest) | 1.5–3% over base rate | 1–2.5% over base rate |
| Admin burden on your team | Low | Higher |
| Best suited to | Businesses that want to outsource collections or lack credit control resources | Businesses with established collection processes want to keep the arrangement private |
| Typical contract length | 12–24 months | 12–24 months |
Invoice Finance Fees Explained
When it comes to the fees for factoring services, businesses should be aware that there is usually a small percentage charged on the total amount of each invoice financed. This fee could vary depending on various factors such as the type of industry your business belongs to and the country you are based in.
In most cases, businesses can expect to pay between 0.3% and 5% of their invoiced value as a factor fee. For example, if the outstanding balance of your invoice is valued at €10,000, then you might have to pay 3% in factor fees, meaning that you will net €9,700 in this scenario.
Additional costs may also apply, but these are typically included within other service charges or might be considered apart from the factor fee itself. Some invoice factoring fees are:
1. Application Fees:
When businesses are first starting out with the process of invoice factoring, they may have to pay an application fee in order to cover the cost of setting up the service within their business. This fee can be a chargeable amount or might be taken directly from your account through a direct debit when you first start using the service.
2. Initial Setup Fees:
After your initial application fee has been accepted, you may also need to pay a setup or sign-up fee that will go towards the costs of opening and setting up your account within the finance company’s software system and getting everything ready for use. This fee could vary depending on how much work is needed in order to set things up, but some companies don’t charge this at all, so it’s always worth checking before committing yourself.
3. Maintenance Fees:
Another type of invoice factoring fee that could be applied is a maintenance or management fee, which is charged every month for using the service and helps cover any additional costs, such as customer queries and administration associated with running your account. This type of monthly fee is quite standard, so it shouldn’t come as too much of a surprise when you see it on your statement.
4. Termination Fee:
If you decide to cancel your invoice factoring service, or if the finance company decides to cancel the service due to missed payments, then a termination fee could be applied to cover the costs of closing down your account and any outstanding balances that are owed. This type of fee can vary depending on the company but is usually a set amount that is taken from your account upon cancellation.
5. Early repayment fees:
Some lenders may charge an early repayment fee if you repay your loan early (before the agreed term). This is typically around 1-2% of the outstanding balance, so it’s something to bear in mind if you think you may be able to repay your loan.
6. Late Payment Fees:
If you are late in making a payment to your factor, then a late payment fee could be applied in order to cover the costs of chasing up the payment and any additional administration associated with this. This type of fee is typically charged as a percentage of the total invoice value that is outstanding and can vary depending on the company, so it’s always worth checking before agreeing to use their service.
7. Upfront fees:
These are typically charged by the lender when you first take out the loan. They can vary depending on the lender and the amount you’re borrowing, but they’re usually around 1-2% of the total loan amount. Some lenders may not have an upfront fee at all.
8. Annual fees:
Again, these can vary depending on the lender and the amount you’re borrowing, but they’re typically around 0.5-1% of the total loan amount.
9. Interest charges:
This is how much interest you’ll be charged on the money you’ve borrowed. The rate will depend on a number of factors, including the lender, the amount you’re borrowing, and the length of time you need to repay the loan.
10. Service fee:
This is charged on the turnover of the borrower. This is important to note because even if you do not borrow funds, you will incur charges. The service fee will normally have a monthly minimum charge.
11. Discount rate:
The discount rate, also known as the interest rate or on-the-money charge, is charged only on outstanding balances. The additional fees will likely include fees for setting up, fees for bank transfers and refactoring fees, which are chargeable if an invoice needs to be reassigned to the borrower.
Conclusion
The fees listed above are just some of the more common ones that businesses should be aware of when using an invoice factoring service. It’s always worth reading through the terms and conditions before agreeing to use a factor so that you know exactly what fees will be applied and when.
Invoice finance can be an extremely helpful tool for businesses, but it’s important to understand the pricing and charges involved before you sign up for a service. We hope this article has provided you with a clear overview of the most common invoice finance charges so that you can make an informed decision about whether or not this type of financing is right for your business.
Get in touch with us at Funding Bay for your invoice financing needs.
Check out our invoice finance calculator here.
